Business context and reporting period
The filing is a Form 10-Q for U.S. Auto Parts Network, Inc., covering the 13 and 39 weeks ended September 29, 2012, compared with periods ended October 1, 2011. The company distributes aftermarket auto parts, primarily through e-commerce websites and marketplaces, with smaller wholesale and other offline channels. The filing names U.S. Auto Parts Network, Inc.; investors should confirm the entity mapping to Carparts.Com, Inc.
Key financial metrics
Amounts below are in millions, except per-share data and percentages.
| Metric | Q3 2012 | Q3 2011 | 39 weeks 2012 | 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $73.0 | $78.6 | $241.2 | $249.8 |
| Gross profit / margin | $22.9 / 31.4% | $24.3 / 31.0% | $73.9 / 30.6% | $83.2 / 33.3% |
| Operating loss | $(2.5) | $(5.2) | $(4.1) | $(7.4) |
| Net loss / diluted loss per share | $(2.7) / $(0.09) | $(5.3) / $(0.17) | $(5.2) / $(0.17) | $(8.1) / $(0.27) |
| Adjusted EBITDA (non-GAAP) | $2.7 | $3.1 | $10.6 | $14.3 |
| Cash from operating activities | Not presented for quarter | $(3.7) | $10.4 |
At September 29, 2012, cash and cash equivalents were $1.1 million and short-term investments were $0.1 million. Current assets were $63.2 million and current liabilities $62.9 million, leaving reported working capital of $0.3 million. Management also cited adjusted working capital of $17.4 million excluding the revolving loan classified as current.
The company had $17.1 million drawn under a $40 million asset-based revolving facility, with $11.8 million of excess availability. The facility matures April 26, 2017; the loan was classified as current because of subjective acceleration provisions and recurring losses, although management said no principal payments were currently due and the company was in covenant compliance. Total liabilities were $66.5 million; capital lease obligations were $0.2 million.
Material changes versus comparable periods
- Q3 sales declined 7.1%; online sales fell 10.2%, partly offset by a 42.0% increase in offline sales. Online sales were 90.8% of Q3 revenue versus 94.0% a year earlier.
- Management attributed the online decline to 9.5% fewer e-commerce unique visitors and a 5.4% decline in average order value, partly offset by a 2.8% improvement in revenue capture.
- Q3 gross margin improved 0.4 percentage points to 31.4%, but year-to-date margin fell 2.7 points to 30.6%, which management attributed to competition and higher freight costs.
- Net losses narrowed year over year, while Q3 adjusted EBITDA fell 14.1% and year-to-date adjusted EBITDA fell from $14.3 million to $10.6 million.
- Year-to-date operating cash flow moved from $10.4 million provided to $3.7 million used. Payments reducing accounts payable and accrued expenses used $12.1 million of cash; inventory reductions provided $3.6 million. Cash declined $9.3 million from year-end.
- Q3 general and administrative expense was lower mainly because the prior-year quarter included $3.8 million of WAG acquisition and integration costs. Fulfillment expense rose 27.8%, primarily due to higher depreciation and amortization from software deployments.
Outlook, risks, contingencies and unusual items
- No specific revenue, earnings or margin guidance is provided. Management expected operating cash generation, cash on hand, investments and, if needed, facility borrowings to cover working capital, planned capital expenditures, technology investment and debt service for at least 12 months, while warning that lower sales or higher costs could create additional financing needs.
- In August 2012, the company closed its La Salle, Illinois call center and reduced its workforce by 71, recording approximately $0.64 million in severance costs. It said no further charges were expected after September 29, 2012.
- The April 2012 refinancing replaced the prior Silicon Valley Bank facility; the company recorded a $0.36 million debt-extinguishment loss. The facility is secured by substantially all assets, subject to exceptions, and borrowing capacity depends on a borrowing base. Excess availability below $6 million can trigger cash dominion and, under specified conditions, a minimum fixed-charge coverage ratio.
- In the Parts Geek litigation, the Ninth Circuit reversed the district court’s summary judgment for Parts Geek, vacated the related fee award, and remanded the case for trial on August 31, 2012. The company recorded no accrual, concluding a loss was not probable and reasonably possible losses would not be material. A $1.1 million fee amount had previously been stipulated in certain outcomes, and a bond was posted.
- The company disclosed asbestos-related lawsuits involving a subsidiary, but stated insurance was expected to limit material out-of-pocket costs. It also identified competition, online traffic and conversion, supplier and shipping dependence, credit-facility availability, seasonality, foreign exchange and technology disruptions among business risks.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. A 10% change in the Philippine peso exchange rate was estimated to affect 39-week Philippine operating expenses by about $1.0 million.
Important facts for investors to verify
- Whether the decline in online visitors and average order value continued, and whether offline growth can offset it.
- Whether gross-margin pressure from competition and freight costs persists, and whether operating improvements translate into positive cash flow.
- Current borrowing-base availability, covenant headroom, cash-dominion triggers and the basis for current classification of the revolving debt.
- Developments and potential costs in the remanded Parts Geek case, including the status of the previously stipulated legal fees and bond.
- Whether the stated 12-month liquidity expectation remains supportable given low cash, operating cash use and planned capital expenditures.
- Confirm that the named registrant and reporting period correspond to the intended Carparts.Com, Inc. issuer record.